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TMI Blog1975 (1) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... and employer's share of contribution payable to the Employees' State Insurance Corporation from January 1, 1965, to the date of the winding-up order, namely, a sum of Rs. 3,306 90, under the Employees' State Insurance Act; ( iii ) account for the sum of Rs. 1,19,862 being the price of the paper in stock which was not handed over to the official liquidator ; and ( iv ) repay a sum of Rs. 15,000 on account of cost of certain structural materials set up by the company on a piece of land of respondent No. 1 which were removed by him. According to the case of the official liquidator, the respondents are, therefore, guilty of misfeasance, misapplication of company's fund and various acts of non-feasance and breach of trust in relation to the company and are accountable and bound to repay and restore the money to the company with interest and costs. In order to appreciate the points arising for my determination, a few relevant facts and circumstances leading to the filing of this application must be stated. The company was registered, inter alia , to carry on the business of printing and publishing a Hindi daily from Patna, namely, the Navarashtra, by the late Sri Devbrat Shastri, fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to make him eligible to be a director, and, as a matter of fact, the Registrar of Joint Stock Companies had not accepted him as a director from the very beginning, and as such on the death of his father there was no duly constituted board of directors and he could not be taken as a director as such. The actual management and control was in the hands of the workers of the company engaged in the publication of the newspaper and the workers who wanted to continue the publication asked him to act as director of the company "though neither he was elected as a director nor he in fact took charge of the office of the director as required in law" and was a mere student at the time who, however, had a desire to perpetuate the name and the political views of his father who had made great sacrifices and in that anxiety allowed the publication to continue and his " name was utilised as director in place of his father". The sum and substance of the plea of respondent No. 1 is not a denial of the charges levelled against the respondents by the official liquidator, but that he was not responsible as such as he was mechanically signing the various documents of the company which was virtually u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted a report (exhibit 3) thereafter, on the basis of which the official liquidator initiated the misfeasance proceeding. In his cross-examination this witness admitted that "we have mentioned at various places in the report, particularly in respect of the matters of contribution to the provident fund and State Insurance Corporation that we did not have all the necessary papers and as auditors it would not be fair for us to say that there has been misfeasance". So far as the major claim for Rs. 1,19,862 on account of the price of paper not accounted for is concerned, complete records of the company were not handed over and the auditors were handicapped to work out the actual amount on the basis of any precise and definite material. Actually what they, therefore, did was to arrive at the amount in question by proceeding on the basis of the opening stock, the acquisitions, thereafter, the purported consumption of the stock and the resulting balance, which should have been there, but was shown as "nil". The quantity of consumption has been worked out on the basis of the actual deposits in the books of account on account of sale price of the newspapers, and in this way the balance ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat time of the age of 20-21 years. The most important statement which has been made by this witness is that the stock of paper used to remain with Devbrat Shastri as long as he was alive and, thereafter, with Ashok Kumar (respondent No. 1). Regarding the value of the materials in the structure, P. W. 4 has also given some evidence. He stated that the sheds were on two sides, approximately 200 feet long on one side and 100 feet on the other. Though this witness was cross-examined at great length, no suggestion was given to him as to why he would depose falsely against respondent No. 1. This witness has stated in his evidence, and obviously, that he "had no concern either with the purchase of paper or its distribution for the purpose of printing, or the keeping of the stock thereof, or the sale", but that by itself, in my opinion, would not discredit or devalue his statement, who happened to occupy a key position in the newspaper, namely, the editor or the chief editor, as to who was in charge of the stock of the newsprint. This witness may not be able to give the exact account of the stock. Public examination of respondents Nos. 1 and 3 was held on the 20th and 23rd December, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the workers and took over the charge of the company. Respondent No. 1, however, definitely stated that respondent No. 3, Shankar Dayal Singh, was one of the two directors of the company on the death of his father. Respondent No. 3, who was examined as court witness No. 2, however, took a still peculiar attitude in his evidence and stated that he had no concern with the company or its publication. He further stated that he was not a director of the company and had purchased no shares of the company. When confronted in his cross-examination with reference to certain documents having been signed by him as the director of the company as well as certain shares of the company standing in his name, he expressed surprise for the existence of the said documents. According to his evidence, he had no knowledge of this case until December, 1973. Narendra Narain Varma (P. W. 5) was the advertisement manager, in the company and stated that the management of the company was conducted under the orders of respondent No. 1 and Uttim Narain was in charge of the accounts of the company and the company had filed a case against him for misappropriation of its money. Kapildeo Prasad (P. W. 6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t signing the documents. From the evidence that has come on the record of this case, just indicated above, it has to be seen as to whether the prayer of the official liquidator is fit to be granted, either in whole or in part, and the respondents or any of them can be held liable for any act of misfeasance or the like and to refund or repay or account for any property or money of the company. The claim against Shri Shankar Dayal Singh (respondent No. 3) can be conveniently disposed of without much discussion. Allegations of misfeasance, misapplication and breach of trust, etc., are serious allegations. Allegations made before the court, therefore, must be specific and the application by the official liquidator should contain a detailed narration of the specific acts of commission and omission on the part of each director, quantifying the loss to the company arising out of such acts or omissions, and the burden of proving the same rests on the official liquidator. Reliance can be placed in support of this proposition on the case of Official Liquidator v. Raghawa Desikachar [1975] 45 Comp. Cas. 136 (SC). In his application itself, the official liquidator has not made out any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thakur (D.W. 1), already referred to earlier. The relevant provision of the English Companies Act, making similar provisions for misfeasance, has been very often judicially noticed and relied upon by the Indian High Courts on a number of occasions. It is since settled beyond controversy that where persons had acted as directors, and the holding of the qualification shares (which they never took) was a condition precedent to eligibility, so that they never were directors at all, they had been held guilty of misfeasance in the abstract by acting when they knew or ought to have known that they were not duly elected. That is, the charge under the section is available against directors and officers of the company de facto , who are not such de jure (R. v. Lawson [1905] 1 KB 541 ). The first point raised on behalf of respondent No. 1 has, therefore, got no substance. In view of the overwhelming evidence on the record that respondent No. 1 assumed charge as the director-in-charge of the company in question and had represented as such to all persons dealing with the company and purported to act accordingly, he cannot be allowed to take shelter under this plea, even assuming that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... getting information regarding the loss of paper and non-payment of various dues of the provident fund contribution and State Insurance Scheme. Even assuming that this case of respondent No. 1 is acceptable, in my view, this conduct of total inaction on his part is sufficient to hold him liable for misfeasance. In the circumstances referred to above, there was sufficient indication to respondent No. 1 to arouse his suspicion and put him on guard. A director may be justified in relying on the skill, honesty and integrity of the officers of a company and is not bound to give continuous attention to its affairs, but if there are grounds for suspecting the officer, he should be careful in placing blind and complete reliance and trust on that officer thereafter. If he fails to exercise control over such officer even thereafter, then he must be presumed to be acting in complete disregard of his responsibility as a director. I am supported in my view on this point by several decisions of the Indian High Courts, namely, Popular Bank Ltd. (In liquidation) v. Krishna Kamath [1963] 1 Comp. LJ 169 , In re Supreme Bank of India Lid. (In liquidation) [1964] 34Comp. Cas. 34 (Mys.) and R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l loss suffered by the company on account of the claim under the four items of charges. So far as the first two items of the charges are concerned, namely, failure on the part of the company to deposit a sum of Rs. 16,279 62 as employees' and employer's share of provident fund contribution with the Provident Fund Commissioner and Rs. 3,306 90 with the Employees' State Insurance Corporation, there is no evidence on the record that on account of the non-deposit of the aforesaid sums, the company has sustained any loss. Rather, the evidence on the record shows that the contributions of the employees were duly entered in the books of accounts of the company and remained in credit with the company itself. The case of the contesting respondent is that these amounts were notionally deducted from the salaries of the employees concerned as the company was short of funds, and in the same way, was carried to the credit of the provident fund and employees' state insurance accounts. It is not the case of the official liquidator that respondent No. 1 has personally misappropriated, misapplied or retained these amounts. The non-payment of the money under these two accounts, therefore, has simpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the director-in-charge of the company on January 12, 1962. There might have been some justification in his plea that he reposed absolute confidence in Uttim Narain in the beginning, but he started advancing loans to the company from 1963 onwards. The auditors in order to work out this account have started with the opening balance as on July 1, 1964, when two years' time had already passed since the taking over charge of the company as the director-in-charge by respondent No.1. During the period of these two years, he was expected to have attained a little more maturity and experience, as a long argument was addressed by Mr. Verma on account of the tender age of this respondent he being only of about 19 years in the year 1962, so much so that he had already started advancing loans to the company a year before than the date of the opening balance in question under compelling circumstances. Even assuming the case of the respondent that he never endeavoured to exercise any control or care to look into the affairs of the company, which fact is not acceptable to me, his passivity after the company started suffering loss is inexcusable and will amount to gross negligence and non-feasance ..... 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